Prof D Mukherjee
The Insolvency and Bankruptcy Code (IBC) 2016 was enacted to streamline the insolvency and bankruptcy resolution process in India, replacing the fragmented provisions of the Companies Act 1956, the Companies Act 2013, the Recovery of Debts Due to Banks and Financial Institutions Act 1993, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act), the Sick Industrial Companies (Special Provisions) Act 1985, the Presidency Towns Insolvency Act 1909, and the Provincial Insolvency Act 1920. The IBC was designed to tackle Non-Performing Assets (NPAs) and debt defaults, aiming to consolidate and amend laws related to the reorganization and insolvency resolution of corporate entities, partnerships, and individuals in a time-bound manner, maximizing asset value and fostering entrepreneurship. The enactment of the IBC 2016 is seen as a transformative law addressing corporate operational failures and financial distress. It aims to revive financially sick and bankrupt firms through Insolvency Resolution Professionals rather than simply winding them up. Despite its ambitious goals, the IBC 2016 faces significant challenges, including legal shortcomings, loopholes, and inadequate capacity to handle cases referred to the National Company Law Tribunal (NCLT) in a timely manner. One of the most pressing issues is the overwhelming accumulation of cases pending before the NCLT. With around 30,000 cases awaiting resolution and only 11 benches to hear them, the system is severely strained, leading to prolonged delays and undermining the IBC’s time-bound resolution objective. The limited number of benches, combined with the growing number of insolvency cases, necessitates a substantial expansion of NCLT infrastructure to expedite the adjudication process.
Additionally, the shortage of judicial and technical members in the NCLT exacerbates the backlog. The complexity and technical nature of insolvency cases require skilled professionals, but the current shortage slows down decision-making, further delaying resolutions. There is an urgent need to appoint more qualified members and provide them with adequate training to handle the intricacies of insolvency and bankruptcy cases effectively. Insolvency Resolution Professionals (IRPs) play a critical role in the insolvency process, acting as intermediaries between the debtor and creditors. However, there is a notable shortage of IRPs, which hampers the efficiency of the resolution process. The scarcity of these professionals leads to delays in initiating and managing insolvency proceedings. Currently the IBC 2016 recognised the Chartered Accountants(CAs), Cost & Management Accountants(CMAs) and Company Secretaries(CSs) within the meaning of the Chartered Accountants Act, 1949, Cost & Works Accountants Act, 1959 and the Company Secretaries Act,1980 respectively as the Insolvency Resolution Professionals who are registered with the Indian Institute of Insolvency Resolution Professionals of the ICAI, Insolvency Professional Agency of Institute of Cost Accountants of India and ICSI Institute of Insolvency Professionals respectively and they are not sufficient to handle all the Insolvency Resolution Process within 30 days of their appointment in terms of the provisions of the Regulations 17(1) read with the Regulations 17(2) of the Insolvency Resolution Process Regulations 2016 and tenure of the IRP is likely to be over before convening the first meeting of the creditors within seven days after filing a report on constituting Committee of the Creditors. The infrastructure supporting the IBC is often found lacking, both in terms of physical facilities and technological support. Many NCLT benches operate out of makeshift offices with inadequate resources, impacting the overall efficiency of the tribunal. Additionally, the integration of advanced technology in case management and documentation is limited, resulting in procedural delays. Investment in state-of-the-art infrastructure and technology is crucial to bolster the IBC framework and improve its operational efficiency. Further, Section 12 of the Code stipulates 180 days (extendable to maximum 270 days) for completion insolvency resolution process but the Code is silent in prescribing any timeline for disposal of appeals, as such it makes the insolvency a long-drawn process in essence.
While the IBC mandates a time-bound resolution process, the absence of strict enforcement mechanisms has led to prolonged hearings and extensions beyond the stipulated timelines. The lack of a definitive time limit for hearings creates uncertainty and diminishes the confidence of stakeholders in the insolvency process. Establishing and enforcing stringent timeframes for case resolutions is necessary to restore the credibility and effectiveness of the IBC. The insolvency resolution process under the IBC is often criticized for its high costs. The expenses associated with legal proceedings, professional fees, and other administrative costs can be prohibitive, particularly for smaller firms. This high cost acts as a deterrent for companies seeking resolution through the IBC and necessitates the development of a cost-effective framework that ensures affordability without compromising on quality. Non-cooperation of management from defaulting companies poses a significant challenge to the insolvency resolution process. In many instances, the management of insolvent firms obstructs the resolution process by withholding critical information or delaying proceedings.
Implementing stricter penalties and enforcement mechanisms against such non-cooperative behaviour is vital to ensure the smooth conduct of insolvency proceedings. Lenders including banks and financial institutions often exhibit a lack of flexibility in negotiations during the insolvency process, prioritizing their interests over the resolution of the company. This rigidity can lead to deadlocks, further delaying the resolution process. Encouraging a more collaborative approach among lenders, facilitated by regulatory guidelines, can enhance the efficiency of insolvency resolutions. Despite the IBC’s aim to maximize the value of assets, recovery rates under the code have often been lower than anticipated. This low recovery is attributed to various factors, including the prolonged resolution process, market conditions, and the deteriorated state of the assets by the time they are resolved. Addressing the root causes of low recovery rates, such as timely intervention and better asset management, is essential to improve the effectiveness of the IBC.
The accumulation of pending IBC cases has severe consequences, similar to the over 5 crore cases pending in India’s courts. This backlog reflects systemic inefficiencies, as highlighted by late jurist Nani A. Palkhivala (1920-2002), who noted it would take 360 years to clear pending cases without capacity enhancement. The prolonged pendency of IBC cases undermines creditor and investor confidence in the insolvency resolution framework. Stakeholders’ loss of faith in the system leads them to opt for informal methods, which lack transparency and legal backing, thereby defeating the IBC’s goal of predictable and efficient resolutions. Delayed resolutions decrease the value of distressed assets, as operational inefficiencies further erode their worth, negatively impacting recovery rates for creditors and the economy. The backlog also strains judicial resources, overburdening judges and tribunal members, reducing productivity, and compromising adjudication quality. This mirrors the broader judicial system’s capacity issues, with the NCLT’s limited resources leading to longer wait times for hearings and decisions. Pending cases create prolonged uncertainty for debtors and creditors, affecting their ability to plan and execute business strategies. This uncertainty discourages new investments due to unresolved financial obligations. The longer a case remains unresolved, the higher the legal and administrative costs, deterring smaller firms from seeking resolution through the IBC. These inefficiencies and delays have broader economic implications, slowing down resource reallocation and economic growth. Efficient insolvency mechanisms are crucial for economic dynamism, allowing distressed assets to be repurposed and revitalized.
The current backlog stifles entrepreneurial activity and innovation, necessitating urgent capacity development for effective case management. The situation with IBC cases reflects India’s broader judicial backlog, with over 5 crore pending cases highlighting systemic inefficiencies and the urgent need for judicial reforms. This backlog affects the legal system’s efficacy, access to justice, and rule of law. Comprehensive reforms are needed, including increasing judicial capacity, procedural reforms, and leveraging technology for better case management. Researchers note that IBC resolution processes are prolonged, averaging 867 days, far exceeding the intended 180 days, and realizing only 86% of the fair value of companies. The IBC often leads to more liquidations than revivals, particularly impacting companies already sick or defunct, with assets valued at only 5% of their claims. Evaluations of the IBC’s performance is sometimes flawed, focusing solely on recovery rates and ignoring other variables like equity realizations or guarantor resolutions. The IBC 2016, despite being landmark legislation, faces challenges such as limited benches, shortages of judicial members, inadequate infrastructure, high resolution costs, non-cooperation from defaulting companies, inflexible lenders, and low recovery rates. Addressing these issues requires expanding infrastructure, enforcing strict timelines, and fostering collaboration among stakeholders to realize the IBC’s full potential, promoting economic growth and stability. Legislative review and better implementation are essential for time-bound resolutions, value maximization, and prioritizing rescue over redundancy.
(The author is a Bangalore based Educationist and Management )
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